Some observers, including those most fearful of a trade war, will be relieved.
Others, who see a substantially undervalued renminbi as a significant factor in
US unemployment, will be disappointed by gradual adjustment. They would have
preferred a sharp revaluation of perhaps 20%...

Still others dismiss the change in Chinese exchange-rate policy as beside the
point. For them, the Chinese current-account surplus and its mirror image, the
US current-account deficit, are the central problem. ... The US is running
external deficits because of a national savings shortfall, which once reflected
spendthrift households but now is the fault of a feckless government.

There is no reason, they conclude, why a change in the renminbi-dollar exchange
rate should have a first-order impact on savings or investment in China, much
less in the US. There is no reason, therefore, why it should have a first-order
impact on the bilateral current-account balance, or, for that matter, on
unemployment, which depends on the same saving and investment behavior.

In fact, both sets of critics have it wrong. China was right to wait in
adjusting its exchange rate, and it is now right to move gradually rather than
discontinuously. ...

China successfully navigated the crisis, avoiding a significant slowdown, by
ramping up public spending. But, as a result, it now has no further scope for
increasing public consumption or investment.

To be sure, building a social safety net, developing financial markets, and
strengthening corporate governance to encourage state enterprises to pay out
more of what they earn would encourage Chinese households to consume. But such
reforms take years to complete. In the meantime, the rate of spending growth in
China will not change dramatically.

As a result, Chinese policymakers have been waiting to see whether the recovery
in the US is real. If it is, China’s exports will grow more rapidly. And if its
exports grow more rapidly, they can allow the renminbi to rise. ...

Evidence that the US recovery will be sustained is mounting. As always, there is
no guarantee. ... Because the increase in US spending on Chinese exports will be
gradual, it also is appropriate for the adjustment in the renminbi-dollar
exchange rate to be gradual. ...

Chinese officials have been on the receiving end of a lot of gratuitous advice.
They have been wise to disregard it. In managing their exchange rate, they have
gotten it exactly right.

Some observers, including those most fearful of a trade war, will be relieved.
Others, who see a substantially undervalued renminbi as a significant factor in
US unemployment, will be disappointed by gradual adjustment. They would have
preferred a sharp revaluation of perhaps 20%...

Still others dismiss the change in Chinese exchange-rate policy as beside the
point. For them, the Chinese current-account surplus and its mirror image, the
US current-account deficit, are the central problem. ... The US is running
external deficits because of a national savings shortfall, which once reflected
spendthrift households but now is the fault of a feckless government.

There is no reason, they conclude, why a change in the renminbi-dollar exchange
rate should have a first-order impact on savings or investment in China, much
less in the US. There is no reason, therefore, why it should have a first-order
impact on the bilateral current-account balance, or, for that matter, on
unemployment, which depends on the same saving and investment behavior.

In fact, both sets of critics have it wrong. China was right to wait in
adjusting its exchange rate, and it is now right to move gradually rather than
discontinuously. ...

China successfully navigated the crisis, avoiding a significant slowdown, by
ramping up public spending. But, as a result, it now has no further scope for
increasing public consumption or investment.

To be sure, building a social safety net, developing financial markets, and
strengthening corporate governance to encourage state enterprises to pay out
more of what they earn would encourage Chinese households to consume. But such
reforms take years to complete. In the meantime, the rate of spending growth in
China will not change dramatically.

As a result, Chinese policymakers have been waiting to see whether the recovery
in the US is real. If it is, China’s exports will grow more rapidly. And if its
exports grow more rapidly, they can allow the renminbi to rise. ...

Evidence that the US recovery will be sustained is mounting. As always, there is
no guarantee. ... Because the increase in US spending on Chinese exports will be
gradual, it also is appropriate for the adjustment in the renminbi-dollar
exchange rate to be gradual. ...

Chinese officials have been on the receiving end of a lot of gratuitous advice.
They have been wise to disregard it. In managing their exchange rate, they have
gotten it exactly right.